Fed’s Lael Brainard pushes digital dollar as central bank currency race heats up

Federal Reserve Governor Lael Brainard attends a Fed Listening event at the Federal Reserve’s headquarters in Washington, DC on October 4, 2019.

Eric Baradat | AFP | Getty Images

Federal Reserve Governor Lael Brainard pushed for a digital dollar, saying Monday that a central bank-backed cryptocurrency could offer a number of benefits.

Providing financial services to nearly one in five Americans considered “underbanked” is one of the benefits Brainard cited in a speech at a conference presented by Coindesk.

She also referred to the security of a Fed-backed system, as well as improvements in efficiency and cross-border payments, or transactions between people in different countries.

While stressing the importance of moving cautiously, Brainard said that the Covid-19 pandemic has increased the need for a system where a broad segment of the public has access to well-regulated digital money.

“The Federal Reserve remains committed to ensuring that the public has access to safe, reliable and secure means of payment, including cash,” she said. “As part of this commitment, we need to investigate and try to anticipate the extent to which household and business needs and preferences may shift to digital payments over time.”

Those comments come days after Fed Chairman Jerome Powell announced that the central bank would issue a working paper this summer addressing several issues related to the central bank’s digital currencies.

The Boston Fed and MIT have started a joint project in which they will create a hypothetical model, and several other Fed districts are also involved in their own research.

In essence, the development of the CBDC would give consumers wider access to electronic currencies, as popularized through the use of Bitcoin and its myriad counterparts. China’s central bank has pushed its own project, as have various others around the world.

Brainard said the pandemic was an example of the importance of developing a Fed-backed currency.

When Congress first started sending aid payments, some individuals did not receive any for weeks because they either did not have accounts or their information was not updated with the IRS. A CBDC would help make money for these people faster, she said.

“In the United States, the pandemic accelerated the migration to digital payments as well as increased demand for cash,” said Brainard in prepared remarks. “While the use of cash increased sharply at certain times, there has been a significant shift from consumers and businesses to contactless transactions made easier by electronic payments.”

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Brainard found that alternative payment systems, without naming specific cryptocurrencies, pose several problems, including potential fraud.

“In contrast, a digital dollar would be a new type of central bank money issued in digital form for the general public,” she said. “By introducing secure central bank funds that households and businesses can access in digital payment systems, a CBDC would reduce counterparty risk and associated consumer protection and financial stability risks.”

The Fed has not set a timetable for its currency. The FedNow service, a payment system that is somewhat similar to a digital dollar, is expected to go online in two years.

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